From North Korea to a bubble in US equities, the world faces a number of risks. Is it time to buy gold?
Gold prices spiked last month after the escalation of tensions between North Korea and the US, breaking above $1,300 to levels last seen in 2016 and 2013.
The yellow metal has risen 16 per cent year-to-date. Conflict in the Asia Pacific region, concerns about China, Brexit and the US Federal Reserve's rate indecision, and the weakening US dollar all contributed to performance.
Over the last few years central banks around the world have been trying to reflate their economies by keeping interest rates low, or even negative, in an attempt to create a little inflation, which in turn should boost the price of gold.
But, while inflation remains at very low levels, some argue that this could actually send gold prices higher, as investors prefer to hold gold relative to cash which yields negative real returns.
The historic role of gold has been as a store of value during economic crisis. It is generally accepted that gold could also be used as an inflation hedge and, therefore, rising inflation is necessary for the cost of gold to increase.
That's because gold is priced in US dollars, so when each dollar becomes less valuable it takes more of them to buy the same amount of gold. Conversely, low inflation and a strengthening US dollar should be seen as negative for gold prices.
Investors still face a lot of uncertainty today such as Brexit, the new US administration and potential war in the Far East, which appears not to be priced into markets currently.
Equity and bond markets are trading at all-time highs after one of the longest bull markets in history, fuelled by extensive quantitative easing by central banks.
With valuations in many areas of the market looking stretched, gold could be a good diversifier for investors' portfolios should equity and bond markets come under pressure.
Investors interested in gold may want to consider ETFS Physical Gold (PHGP), an exchange-traded fund (ETF) that is backed by gold bullion. It provides a return equivalent to the movements in the gold spot price.
ETF Securities is a global pioneer in exchange traded products (ETPs), having developed the world's first gold ETP in 2003.
However, investors should be aware that physical gold and gold mining stocks are quite different asset classes. While physical gold is better for inflation hedging and diversification, gold mining stocks provide an operating leverage for investors comfortable with greater risk.
As the gold price appreciates, the mining company's margins improve, so the potential return to investors likely goes up at a faster rate than the rise in gold. In this case, mining stocks become a better option than holding physical gold.
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This article was originally published on our sister website Interactive Investor.
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